Wall Street recommends purchasing shares of Zoom Video Communications Inc. (ZM, Financial) and FinVolution Group (FINV, Financial). That is surprising given these two stocks haven't performed well over the past 52 weeks ending March 11. With positive recommendations despite share prices tumbling more than 59%, these two companies have earned the status of "falling knives."
Typically, investors are interested in falling knives because they want to earn significant returns after an expected stock price rebound. However, investors must be cautious with falling knives as these kinds of holdings carry a remarkable level of risk. The sharp drop in the stock's price could be a sign of ongoing problems - after all, investors have been selling them for a reason.
Zoom Video Communications
Zoom Video Communications (ZM, Financial) is a San Jose, California-based provider of a platform for video-first communication services worldwide.
Shares closed at $98.12 per unit on Friday after falling 71.95% over the past 52 weeks.
The market capitalization is about $29.35 billion, the 52-week range is $97.9 to $406.48 and the 14-day relative strength index is 26, suggesting the stock isn't that far from oversold levels.
Regarding its financial strength, GuruFocus assigned a score of 9 out of 10 to the company, which means conditions are solid. As of Jan. 30, the company had $5.42 billion in cash and cash equivalents, far exceeding the total debt of $105.72 million. The Altman Z-Score of 12.61 suggests the company is in the safe zone, while the Piotroski F-Score of 6 indicates strong business operations.
As of the time of writing, Zoom Video Communications' weighted average cost of capital was 7.95%, while the return on invested capital was 64.06% (calculated using trailing 12-month profit and loss data). This comparison concludes that Zoom Video Communications profitably allocates funds to capital projects because the return the company receives from the investment exceeds the cost of the capital raised to fund the allocation. Should the company maintain this capability, the growth will likely lead to an appreciation in the value of the stock.
In terms of profitability, all financial metrics are positive. Of note is the three-year earnings per share excluding one-time items yearly average growth rate of 431.3%, which also far outperforms the three-year revenue yearly average growth rate of 121.7%, suggesting operations are efficient as profit margins expand along with growth.
The company continues to see a growing number of clients using its communications platform worldwide, which should prompt shareholders to think more positively about the future of their investments.
In addition, Zoom Video sees additional growth opportunities in the future as the home office module becomes commonplace. In fact, employees will have to rely on the company’s technology more than in the past when doing their work remotely.
The company plans to address the expected increase in demand for video communications services by equipping the platform with more cloud-based advanced solutions.
On Wall Street, the stock has a median recommendation rating of overweight with an average target price of $169.79 per share.
FinVolution Group
FinVolution Group (FINV, Financial) is a Shanghai-based operator of an online consumer finance marketplace in mainland China, connecting individuals in need of credit directly with financial institutions.
Shares closed at $3.08 per piece on Friday after falling 60.81% over the past 52 weeks.
The market cap is around $872.81 million, the 52-week range is between $3.055 and $10.41 and the 14-day relative strength index is 28, suggesting the stock is not far from oversold levels after the significant downturn.
GuruFocus gave the company a 9 out of 10 financial strength rating, meaning conditions are solid. As of Sept. 30, the company had $5.09 billion in cash and cash equivalents, while total debt was $19.97 million. The Altman Z-score of 2.98 suggests the company in the safe zone, while the Piotroski F-score of 6 shows operations are strong.
As of the time of writing, FinVolution Group invests profitably as the WACC of 9.95% is significantly below the ROIC of 27.50%. The investment involves paying the cost of capital that the business must necessarily sustain while generating a much higher return. At this rate, the value of the stock should increase with growth.
GuruFocus has rated the company's profitability as 8 out of 10 as all major financial indicators are positive.
Domestic consumption is increasingly becoming the engine of Chinese growth, Ning Jizhe, head of the National Bureau of Statistics, emphasized recently when he presented retail sales data for 2021. But to drive growth through domestic consumption rather than exports (which is the central government's goal), China's capital markets must function properly, according to Nicholas Yeo, director and head of the China/Hong Kong Equities team at Aberdeen Standard Investments.
Therefore, a series of ad hoc interventions by the Chinese government, including facilitating access to consumer credit, can be expected in the coming months.
This scenario seems to bode well for FinVolution Group, while its growth strategy based on increasing collaboration with buy now, pay later operators seems appropriate. In my view, the stock is on track for a strong bounce back.
On Wall Street, the stock has a median recommendation rating of overweight with an average target price of approximately $7.81 per share.
